Determine from the following the factor that would most likely elevate the auditor's concern about the risk of financial statement fraud.
A) company cannot borrow debt capital without restrictive covenants
B) company finds it difficult to sell equity capital for expansion
C) company has a significant portion of liquid assets on its balance sheet
D) company reports substantial net income but ever decreasing cash flow from operations

Question

Quizplus · Accepted Answer

The fact that the company reports substantial net income but ever decreasing cash flow from operations indicates that there may be overstated revenue or understated expenses, which are red flags for financial statement fraud. It suggests that there may be aggressive accounting practices, such as recognizing revenue too early or deferring expenses, to manipulate the reported earnings. This would elevate the auditor's concern about the risk of financial statement fraud. The other choices do not necessarily indicate an increased risk of financial statement fraud.

Determine from the Following the Factor That Would Most Likely